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The Honolulu Advertiser
Posted on: Friday, April 21, 2006

Blame game heating up over gas prices

By Steven Mufson
Washington Post

WASHINGTON When Severin Borenstein drove by a Shell station in Orinda, Calif., yesterday morning, the price of unleaded gasoline was $2.99 a gallon. When he drove by five hours later, the price was $3.10 a gallon.

Borenstein has a better grasp of why that happened than most. He's a professor of business and public policy at the University of California at Berkeley and is director of the University of California Energy Institute.

"The oil side is one piece of this. The refining side is another piece of this," he said.

Oil prices are soaring, with the price of crude at more than $70 a barrel on world markets and 37 percent higher than a year ago. That works out to more than $1.70 a gallon, more than half the cost of a gallon of regular unleaded gasoline.

The next biggest chunk of the cost of a gallon of gasoline is the cost of refining, which is now about twice the average levels over the past five years. And that has sparked controversy over whether oil refiners have been gouging consumers by holding back on expanding capacity to gain more power over prices.

The oil companies deny those allegations, but what's not in dispute is what's happening at the gasoline pumps.

"What's going on is just a continued reflection of the worsening supply-and-demand balance, and when you get into a tight market, small changes can cause big price movements," said Borenstein, explaining the rising price of crude oil.

He added that the reasons for fatter refining margins were not so clear. "This is the time of year when that number always goes up, but it has gone up more than usual," Borenstein said. "What we're seeing is that refineries are making huge profits. We have not been building refineries, demand continues to grow, and supply is not keeping up with it."

When oil prices spiked last year, the reasons seemed temporary: hurricane damage on the Gulf Coast and unusually low inventories of crude oil and gasoline. This year, inventories have mostly been rising since January and hurricane season is still months away. (On Thursday, the American Petroleum Institute said crude oil inventories dipped slightly but still stood 6.7 percent higher than the year before while gasoline stocks fell to 4 percent below the level a year earlier.)

Sen. Charles Schumer, D-N.Y., on Tuesday called on the Federal Trade Commission to make sure oil companies weren't intentionally keeping refinery capacity offline to jack up prices. He cited a 5-percentage-point decline in refinery utilization rates.

The American Petroleum Institute denied suggestions by some lawmakers that oil companies were keeping refinery capacity offline to jack up prices. "Any charge that oil companies are intentionally driving up prices ignores the very obvious fact that refinery capacity has been lower because the industry is still in the process of recovering from the extensive damage caused by hurricanes Katrina and Rita last summer," the API said in a statement. "It is a fact that three refineries remain closed since the hurricanes. The combined capacity of those refineries is 804,000 barrels per day or about 5 percent of U.S. refinery capacity, the same amount Senator Schumer mentions."

Refiners say that the shortage of capacity in their industry has been years in the making and, because of the long time it takes to build refineries, will also be years in the fixing. For years, it was a low-margin, capital-intensive business shunned by investors.

"The curves have crossed, and (profit) margins have improved," said Bruce Smith, chairman and chief executive of Tesoro Corp., a large independent refiner. "Only by improving margins do people have enough to invest in new facilities."

This year, however, billions of dollars of investments in refineries will be channeled into improving the quality of petroleum products to meet new environmental standards, companies say.